Question

1. Why are different materiality thresholds relevant for different audit engagements?

2. Why are different materiality bases considered when determining planning materiality?

3. Why is the materiality base that results in the smallest threshold generally used for planning purposes?

4. Why is the risk of management fraud considered when determining performance materiality?

Answer 1

A) Different materiality thresholds are relevant for each audit engagement because various industries contain various risks ie it may be high for one industry and vice versa. Also, certain companies have varying amounts of risk due to their history of past misstatements and past year’s financial health of the company.

B) Different materiality bases are considered when determining planning materiality because since financial information is prepared for multiple users who have different purposes, therefore not allof the components of the financial statements are relevant to all users. Stockholders will be focused more toward the long-term revenue and profit growth as opposed to creditors.

C) Both balance sheet and income statement account are affected by most of the misstatement. Therefore, an audit needs to be design to detect the smallest misstatement that would influence users. This is also a requirement to assure that the financial statements are free of material misstatement.

D) Thee risk of management fraud considered when determining performance materiality because the auditor's assume that there is a chance that management may intentionally misstate the financial statements and there is a chance that it is a materialy misstated that could be systematically biased in one direction across accounts.